In this section:
Incentive awards and PAYE
An incentive award is usually used as an alternative to increasing an employee's pay. It can involve rewarding your employee in a wide variety of ways such as with cash, goods, prizes, holidays or vouchers. This guide explains how you should treat these awards for PAYE (Pay As You Earn) tax and National Insurance contributions (NICs) purposes.
How to treat incentive awards for PAYE tax and NICs purposes
The steps you need to take when one of your employees receives an incentive award depend on the following two factors:
- whether the award is in cash (including vouchers exchangeable for cash)
- whether the award is made directly by you, or by another business
An example of another business providing an incentive award would be a car manufacturer making performance related awards to salespersons employed at dealerships.
Awards of cash or vouchers exchangeable for cash
If you provide an employee with a cash award, then you must include its value in the employee's gross pay when working out both PAYE tax and NICs.
If a cash award is made to one of your employees by another business, then you are responsible for calculating and paying the NICs due on the award. The other business is responsible for deducting PAYE tax from the award. You should add the value of the award to the employee's pay - NICs are due on this revised gross pay figure. You can then deduct the employee's share of NICs from their cash earnings.
With vouchers exchangeable for cash, the position for PAYE tax and NICs remains the same regardless of who gives the voucher to your employee. You are responsible for deducting PAYE tax and paying NICs due on the award.
Non-cash awards and vouchers that can't be exchanged for cash
The position is slightly more complicated for non-cash incentive awards, as different procedures apply to PAYE tax and to NICs.
The subsections below provide an overview of the rules for non-cash awards. More detail is contained in pages 24-27 of our publication 'Employer further guide to PAYE and NICs (CWG2)' - you'll find a link to it at the bottom of this guide.
Valuing non-cash awards and vouchers
The value you should use for any deductions you must make is the cost to you of providing the non-cash award. There is an exception for luncheon and childcare vouchers - for these, the value to use is the voucher's face value.
PAYE tax on non-cash awards including non-cash vouchers
If you provide an employee with a non-cash award or a voucher that can't be exchanged for cash, you must account for it in one of the following two ways:
- by filling in the gross value of the award on form P11D or form P9D
- by entering into a Taxed Award Scheme (TAS) or a PAYE Settlement Agreement (PSA) with us
If a non-cash award is provided by another business to one of your employees, then the other business is responsible for the PAYE tax due on it and must account for it using aTAS.
More about PAYE Settlement Agreements
Download an overview of the Taxed Award Scheme
NICs on non-cash vouchers
A significant range of non-cash vouchers are exempt from NICs. These include vouchers for:
- meals on your premises
- travel between home and work on a work bus
- social functions, such as a Christmas party, up to £150 per head
- the first £55 per week of childcare
This is a selective list. For a full list see pages 26-27 of the CWG2 publication mentioned above - there is a link at the bottom of this guide.
With the exception of these exempt vouchers, you are responsible for deducting NICs if you provide a non-cash voucher to an employee or if you arrange for another business to provide one. You must add the value of the award to the employee's gross pay and work out the Class 1 NICs due on the total in the normal way.
In general, if another business provides one of your employees with a non-cash voucher without you arranging it, then you do not need to worry about the NICs due on the award. It is the third party's responsibility to pay the NICs owed. These will be Class 1A NICs, associated with benefits in kind, rather than the Class 1 NICs due on gross pay.
There is an exception for vouchers provided by a third party in connection
with payments to employees of readily convertible assets (these are
explained in another guide - see the link below). In these cases it
doesn't matter who arranged the award. As the employer you will always
be responsible for adding the value to gross pay and deducting NICs.
More about readily convertible assets (RCAs)
NICs on non-cash awards other than non-cash vouchers
Different non-cash awards are treated in different ways for NICs purposes. Some attract Class 1 NICs and should be added to gross pay, while others attract Class 1A NICs and are accounted for as benefits received by the employee. (For more information about reporting and paying Class 1A NICs, see our guidance on expenses and benefits - use the link at the bottom of this guide.)
To find out whether a specific non-cash award attracts Class 1 or Class 1A NICs, see the two tables on pages 74-78 and pages 81-83 of our CWG2 publication - there is a link to it at the bottom of this page.
Once you know whether Class 1 or Class 1A apply, you must treat the award in the following way:
- If the award to one of your employees attracts Class 1 NICs, then you must calculate and deduct them, regardless of who provides or arranges the award.
- If the award attracts Class 1A NICs, then you must report and pay them if you provide the award or if you arrange for a third party to provide to it. If a third party provides it, and you have no role in arranging this, then it is the third party's responsibility to report and pay the Class 1A NICs.
Download our publication 'Employer Further Guide to PAYE and NICs (CWG2)' (PDF 461 KB)
Read our guidance on expenses and benefits
For help with calculating and deducting PAYE tax and NICs on incentive awards, contact our Employer Helpline on Tel 08457 143 143. The helpline is open 8.00 am to 8.00 pm Monday to Friday and 8.00 am to 5.00 pm on Saturday and Sunday.
